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Question 2 (15 Points)

2. A high-yield bond with the following features:

Principal $1,000

Coupon7%

Maturity 10 years

Special Features company may extend the life of the bond to 16 years

a) Based on the features above, what type of bond is this bond? (2 points)

(b) If you expect that interest rates will be 5 percent ten years from now, how much would you currently pay for this bond? (7 points)

c) What is your potential gain or loss if you buy the bond based on that expectation but interest rates are 10 percent ten years from now? (5 points)

(d) If your expectation in 2(b) is correct, do you think the issuer will extend this bond? (1 point)